What kind of changes Shanghai FTZ brought?

Shanghai Pilot Free Trade Zone (FTZ) has been launched for 1 year. Looking back the year, the smooth operation of the FTZ was not only related to the zone itself, but also to the next step of reform and opening up of China.

Business registration and negative list are experiences worth spreading

Then, over the past year, what kind of replicable experience the FTZ can provide to the rest of the country? Currently, the most distinct achievements are mainly showed in the two aspects as follows:

The first is the reform in business registration system. Shanghai FTZ has implemented the new capital registration system instead of the former paid-in registered capital requirements. Also, there are pilots of announcement system of enterprise annual report and unified pattern of business license. After the implementation in the FTZ, the business registration system was soon recognized by the State Council. On February 7, 2014, the State Council issued the Reform Plan of the Registered Capital System, boosting reform in business registration system over the country, meanwhile, the NPC Standing Committee also made some amendments on laws and regulations such as the Company Law.

The effect of the reform is obvious. From January this year to August, newly registered companies of China has increased by 15.75% over the same period of the earlier year, while newly registered capital has increased by 66.7%. Private enterprises and individual businesses have become the main channels to absorb employment. Business registration becomes more convenient and capital cost for the establishment of a company has been cut down.

The second is the negative list. Generally, negative list refers to a list of industries which foreign investment are banned or restrained in terms of proportion of investment. The primary reason why the negative list is advocated by so many countries owes to the principle that “if there are no bans and restricts by law, there is freedom to do it”, namely, anything without limitations from the law can be done by enterprises and individuals. However, as for China, since the boundary between government and market has been not so clear for long time, thus negative list is also applicable for domestic enterprises. Consequently, negative list becomes not only an industry access directory for foreign investors, but also a carrier of the reform of administrative management system led by the State Council in an up-down manner.

Finance and innovation has not perform as well as expected

In fact, these successful experiments all have two noticeable features. One is that such issues only involve one department of the central government. For instance, business registration goes to the State Administration for Industry & Commerce and negative list goes to the Ministry of Commerce. The other one is that the objectives of the reform only touch on procedural issues without substantive rights. In contrast, those experiments related to more than one department or concerning substantive rights does not go on well. This can be detected from the innovations on financial opening up.

After the launching of the FTZ, both the industries and academic circles have had high expectation on financial reform in the FTZ, some even thought that financial internalization and innovation of financial system reform are the most important missions for the FTZ. But, so far, the financial opening up and innovation is not eye-catching enough. There is certainly time factor we should consider. It is too demanding asking for substantive affects within just one year. But, the more important reason may lie in the difficulties of coordination of such interests—there is more than just issues about substantive rights. It concerns different departments, which means, requiring more communication and coordination costs.

For this matter, when we require the FTZ for more replicable innovation measures in terms of investment, trade, finance, supervision and other field, we should firstly ask ourselves the single question: Does the law provide enough space for these reforms? The innovation and opening up of the FTZ, in essence, should be operated within the framework of the law—as the central government stated one year ago, the FTZ does not means ‘policy privileges’.

Published in the Beijing News| 2014-9-18